Co-signed on $128,000 student loan. What now?

Dear Dr. Don,My niece's education is dragging my family into massive debt. Her parents and grandparents have co-signed for about $128,000 in student loans that she has refused to pay. It's a major burden for the grandparents, who are in their mid-70s and living on Social Security. My niece's parents are also losing their home because they cannot pay both her loan and their mortgage. My sister-in-law is on disability due to multiple sclerosis.

So here are my questions:

Will a collection agency garnish my niece's salary if the loan isn't being paid?

How would a collection affect her credit score?

Is there anything the elderly grandparents can do to end this very stressful situation? Would taking her to court work?

Is there a way to keep debt collectors from harassing them?

Thanks,-- Debbie

Dear Debbie,Yours is a cautionary tale for parents and relatives who co-sign a student loan.

As co-signers, they're just as responsible for that debt as the primary borrower. In some states, lenders are required to go to the primary borrower first for payments. But they don't stop there. So if your niece isn't making payments, her co-signers are expected to do so.

Creditors can and will take you to court to get their money. If they win a judgment against the borrower, they may, depending on state law, have the ability to garnish bank accounts and other assets. Social Security retirement benefits can be trimmed to pay for student loan debt, though there are limits as to how much.

Your parents and your sibling can take your niece to court, too, but it's unlikely to make things better. You would need to prove that it would be an undue hardship to pay the loans. Undue-hardship cases are hard to win. You should talk to a lawyer about your chances.

It's fairly easy to get collection agencies to stop contacting a borrower. The borrower only needs to write to the agency and ask that they stop. I recommend that you read the Federal Trade Commission's publication, "Debt Collection FAQs: A Guide for Consumers" for more details. That publication also speaks to debt collectors' harassment of debtors.

If they don't pay the student loan, it will negatively impact credit reports and scores for everyone involved. Both the primary borrower and the co-signers' credit will be affected by nonpayment or default on a student loan. You can blunt the impact of this by working with the lender to extend the loan term and make the payments more affordable. Those extensions can stretch the term by as much as 30 years.

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